Prediction Markets and Corporate Compliance: Why Companies Should Act Now

Prediction markets have rapidly evolved from platforms focused primarily on hedging commodity prices into increasingly sophisticated markets covering elections, sports, corporate, regulatory, economic, and geopolitical events. As these markets expand, so too do the compliance and governance risks for organizations whose employees, directors, and other insiders may possess confidential information relevant to those events.

A recent enforcement action by the U.S. Attorney’s Office for the Southern District of New York (SDNY) and the Commodity Futures Trading Commission (CFTC) underscores that regulators are focused on precisely this issue. In what has been described as the first insider trading case involving prediction markets, authorities brought parallel criminal and civil actions against an individual accused of using confidential government information to trade event contracts on Polymarket.¹

Although the allegations in that case involved classified government information, the broader takeaway for companies and other organizations is more significant: Regulators appear increasingly willing to apply existing insider trading, commodities fraud, and antimisappropriation principles to prediction market activity. In recent public remarks, the CFTC has expressly stated that insider trading prohibitions apply in prediction markets just as they do in more traditional financial markets.

Against that backdrop, all organizations — whether public, private, for profit or not — should consider whether their existing compliance policies adequately address prediction market activity and the use of confidential or proprietary information in those markets.

Prediction Markets Create New Compliance Risks

Prediction markets allow users to trade contracts tied to the outcome of future events. Increasingly, those events involve matters directly connected to corporate, regulatory, or institutional activity, including

• mergers and acquisitions
• earnings announcements
• changes in stock price
• regulatory approvals
• litigation outcomes
• executive departures government
• investigations contract awards
• geopolitical or legislative developments

In many cases, employees, directors, and other insiders may possess confidential information that could materially affect the value of those event contracts before the information becomes public. Importantly, these risks are not limited to publicly traded companies and may arise in connection with confidential information held by private companies, healthcare and life sciences organizations, universities, nonprofits, government contractors, and professional services firms.

Historically, insider trading compliance programs were implemented only at publicly traded companies and focused primarily on securities transactions involving publicly traded stock. Because the use of online prediction markets is a relatively new phenomenon, those programs have not explicitly addressed prediction market activity. In addition, prediction market trading may involve contracts unrelated to publicly traded securities and may implicate confidential information held by private companies, nonprofits, universities, healthcare systems, government contractors, and other organizations that historically may not have maintained formal insider trading policies. As a result, employees and other personnel at public or private companies may incorrectly assume that existing restrictions on the misuse of confidential or proprietary information do not apply to prediction market activity, creating potential ambiguity and increased compliance risk for organizations.

For example, employees at publicly traded companies who understand that purchasing company securities while aware of material nonpublic information (MNPI) is prohibited may mistakenly believe that trading prediction market contracts tied to earnings announcements, regulatory approvals, acquisition activity, or other confidential information obtained through their employment is permissible. Likewise, employees of private companies may not understand that trading on prediction markets based on confidential business information may lead to criminal or civil liability, and employees of government contractors, universities, or nonprofits may not appreciate that confidential procurement, investigative, or leadership information could create similar risks if used in connection with prediction market trading.

Regulators appear increasingly focused on clarifying participant liabilities associated with prediction markets. In announcing the recent enforcement action, U.S. Attorney Jay Clayton stated that “[p]rediction markets are not a haven for using misappropriated confidential or classified information for personal gain.”

Existing Policies May Not Be Sufficient

Many publicly traded corporations maintain insider trading and confidentiality policies drafted before the recent expansion of prediction markets. Those policies often prohibit

• trading company securities while in possession of MNPI
• tipping others regarding securities transactions
• misuse of confidential company information

However, they have not historically addressed prediction markets, event contracts, swaps or derivatives, or trading activity unrelated to traditional securities markets.

Posing perhaps a greater risk, many private companies, nonprofits, universities, healthcare systems, and other organizations that possess highly sensitive information may not maintain formal insider trading policies at all because they historically were not exposed to traditional securities trading risks. For emerging companies operating in areas of sensitive technologies, government contracting or other highly regulated sectors, this risk may create substantial operational disruption for their businesses.

That gap may create significant legal, compliance, and reputational risk, particularly where employees mistakenly believe that prediction market activity falls outside existing insider trading, confidentiality, or ethics restrictions. Organizations may also face regulatory scrutiny and questions regarding the adequacy of their compliance controls and governance frameworks.

The recent SDNY and CFTC actions suggest that authorities are prepared to apply existing fraud, commodities, and misappropriation theories aggressively in this space. The CFTC specifically characterized the matter as the agency’s first insider trading case involving event contracts and its first use of the so-called “Eddie Murphy Rule,” which prohibits government employees and other persons who obtain confidential government information from using that information to trade futures, options, or swaps.

Although the contours of liability in prediction markets will likely continue to develop through litigation, companies and other organizations should not wait for definitive judicial guidance before evaluating whether their policies should be updated.

Practical Steps to Consider Now

As companies and other organizations evaluate whether their existing governance and compliance frameworks adequately address prediction market activity, they may wish to consider whether existing policies, training, certifications, and escalation procedures appropriately address the use of confidential or proprietary information in prediction markets and similar platforms. Examples of practical policy enhancements may include the following:

• for companies with insider trading policies,
  • expressly referencing prediction markets and event contracts in insider trading policies; for example, a policy could provide that employees may not “purchase, sell, or otherwise engage in transactions involving prediction markets or event contracts relating to the company while aware of material nonpublic or confidential business information”
  • broadening definitions of prohibited trading activity; rather than limiting restrictions to “company securities,” policies could prohibit the misuse of confidential information in “any securities, derivatives, event contracts, swaps, prediction markets, or similar financial instruments”
  • perhaps choosing a more conservative route to prohibit insiders from participating in prediction markets involving company events altogether or applying such a prohibition to all directors and officers
• for private companies and other organizations that do not have insider trading policies, adopting such policies or an appropriate code of ethics prohibiting misuse of confidential business information, including trading on predictions markets
• adding stand-alone code of conduct language addressing misuse of confidential information; for organizations that do not maintain formal insider trading policies — or that wish to reinforce broader ethical obligations — codes of conduct could clarify that employees may not use confidential, proprietary, client, or government information for personal gain in any market or platform, including prediction markets
• enhancing illustrative examples in employee policies or training materials; for example, policies could explain that an employee who learns confidential information about a pending acquisition, cybersecurity incident, or regulatory approval may not trade on a prediction market tied to that event
• clarifying that restrictions apply regardless of whether the platform is regulated or whether the instrument is technically a security; this may help address employee misconceptions that prediction market activity falls outside traditional insider trading restrictions
• updating annual certifications and compliance training; organizations may wish to incorporate guidance and examples clarifying that insider trading, confidentiality, and ethics obligations extend to prediction markets and similar platforms
• assessing whether enhanced restrictions are appropriate for certain individuals, such as discussed above for directors and officers; companies may determine that employees or other individuals with access to particularly sensitive transactional, regulatory, governmental, or cybersecurity information should be prohibited from participating in specified categories of event contracts altogether

In many cases, relatively modest revisions to existing policies may substantially reduce ambiguity and strengthen the organization’s compliance posture.

Our Take

The first prediction market insider trading case signals that regulators are scrutinizing trading activity involving confidential information outside traditional securities markets. While the legal framework governing prediction markets continues to evolve, enforcement agencies have already made clear that they do not view these platforms as exempt from existing antifraud and insider trading principles.

Existing insider trading, confidentiality, and code of conduct policies were historically not drafted with prediction markets in mind. Updating those policies now may help mitigate legal, reputational, and compliance risks before those risks become more acute.

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¹See Sidley’s White Collar Defense and Investigation Update, The First Prediction Market Insider Trading Case: SDNY and CFTC Test the Limits of Fraud and Commodities Law.